We've all heard of day traders "making millions" on TikTok and finance gurus with large trading portfolios. While these personas make stocks seem like an easy concept to understand, it's more than just buying and selling stocks. I mean, what exactly is a stock?
A stock represents a share in the ownership of a company. A stock can also be referred to as a share or equity.
When you purchase a stock, you are buying a small piece of that company, known as a share. Companies issue stocks to raise capital for various purposes such as expanding operations, launching new products, or paying off debt. When you own a share of a company, you become a shareholder, which gives you certain rights, including voting on corporate matters (depending on how big of a shareholder you are) and receiving dividends if the company distributes profits.
How do you trade stocks?
Before electronic trading (the Internet), people used to visit physical locations where buyers and sellers met and negotiated prices to buy and sell stocks. Nowadays, it is much easier for us to buy and sell shares. We can use brokerage apps, like TD Ameritrade, ETrade, or Wells Fargo to trade stocks. Stocks are traded on stock exchanges, such as the New York Stock Exchange (NYSE) and the Nasdaq. These exchanges facilitate the buying and selling of stocks between investors. When you place an order to buy or sell a stock using your choice of brokerage, your broker sends this order to the exchange, where it is matched with a corresponding order from another investor.
Changes in stock price
Stock prices fluctuate based on supply and demand. If more people want to buy a stock than sell it, the price will go up. Conversely, if more people want to sell a stock than buy it, the price will go down. Various factors influence these supply and demand dynamics, including:
The news/media - Media coverage can significantly influence stock prices by shaping public perception and investor sentiment, often leading to rapid buying or selling based on the latest news.
Company Performance: Positive earnings reports, new product launches, or successful business strategies can drive stock prices up. Conversely, poor earnings reports, product failures, or scandals can drive prices down.
Economic Indicators: Macroeconomic factors such as interest rates, inflation, and employment rates can affect stock prices. For example, lower interest rates can make borrowing cheaper for companies, potentially boosting their profits and stock prices.
What is day trading?
Day traders buy and sell securities within the same trading day, aiming to profit from short-term market fluctuations. They rely heavily on technical analysis, market trends, and real-time data to make quick decisions.
Capital gains taxes on stocks
When you make a profit off of selling a stock after you buy it, that profit is called your capital gains. However, you are typically going to be taxed after you sell your capital gains for personal profit. There are two types of capital gains taxes:
Short-Term Capital Gains:
These gains are realized from the sale of assets held for one year or less.
Short-term capital gains are taxed at ordinary income tax rates, which are generally higher.
Long-Term Capital Gains:
These gains come from the sale of assets held for more than one year.
Long-term capital gains benefit from reduced tax rates, which are typically lower than ordinary income tax rates.
In conclusion, while the stories of day traders making millions and finance gurus with extensive portfolios make stock trading seem straightforward, understanding stocks involves more than just buying and selling. Stocks represent ownership in companies, and their prices are influenced by various factors such as company performance, economic indicators, and media coverage. By grasping these fundamentals, you can make more informed investment decisions and navigate the stock market with greater confidence. Thus, you can be more well-informed about one of the most important financial decisions for your future: investing.
